# Appendix — Behlen v. Merrill Lynch & Co.

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386015_1449%3A2

## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 2003
- **Citation:** 539 U.S. 927

## Text

eas

Al

APPENDIX A
311 F.3d 1087
Fed. Sec. L. Rep. P 92,201, 16 Fla. L. Weekly Fed. C 13

United States Court of Appeals,
Eleventh Circuit.

Charles H. BEHLEN, individually and on behalf of a
class of similarly situated persons and entities, Plaintiff-
Appellant,

v.

MERRILL LYNCH, Phoenix Investment Partners, Ltd.,
Defendants-Appellees.

No. 01-16424.
Nov. 8, 2002.

[West headnotes and summary deleted]

[*1089] Albert L. Jordan, Michael L. Jackson, Wallace,
Jordan, Ratliff & Brandt, L.L.C., Birmingham, AL, JosephM.
Druhan, Jr., Mobile, AL, M. Stephen Dampier, Montgomery,
AL, Anthony M. Hoffman, Zieman, Speegle, Oldweiler &
Jackson, L.L.C., Mobile, AL, for Plaintiff-A ppellant.

Luther M. Dorr, Jr., A. Inge Selden, III, Maynard

i

Cooper, Frierson & Gale, Birmingham, AL, Kelly D. Reese,
Mobile, AL, Julie Wilson, Maynard, Cooper & Gale, P.C.,
Montgomery, AL, D. Brent Baker, Frazer, Greene, Upchurch
& Baker, P. Russel Myles, McDowell, Knight, Roedder &
Sledge, LLC, Mobile, AL, for Defendants-Appellees.

A2

Appeal from the United States District Court for the
Southern District of Alabama.

Before WILSON, RONEY and ALARCON*%, Circuit
Judges.

WILSON, Circuit Judge:

Charles H. Behlen, individually and on behalf ofa class
of similarly situated individuals, appeals the districtcourt's
denial of his motion to remand his case to state court and its
order dismissing his lawsuit. The district court determined
that it had removal and supplemental jurisdiction over the
action and therefore denied the motion to remand. The
court further determined that the action was barred by the
Securities Litigation Uniform Standards Act of 1998
(SLUSA), 15 U.S.C. §§77p, 78bb. Thus, the court dismissed
Behlen's class-wide claims with prejudice and his individual
claims without prejudice. Because we determine that the
action was preempted by the SLUSA and subject to
dismissal, we affirm.

BACKGROUND

From November 1999 to March 2000 Behlen purchased
shares in a mutual fund known as the Phoenix-Engemann
Aggressive Growth Fund. Behlen purchased the shares
from Merrill Lynch & Co. and Phoenix Investment Partners,
Ltd. (the defendants). On March 15, 2001, Behlen filed a
civil action in statecourt seeking to recover money damages

*Honorable Arthur L. Alarcon, U.S. Circuit Judge for the
Ninth Circuit, sitting by designation.

A3

resulting from his purchase of those shares. In his original
complaint, which was styled as a class action, Behlen
asserted various state law claims, including claims for
breach of contract, breach of implied covenants and duties,
breach of fiduciary duty, unjust enrichment, suppression,
misrepresentation, and negligence and/or wantonness. He
alleged that the defendants sold him and the class members
Class B shares in the growth fund when they were
unknowingly eligible to purchase Class A shares. He
further alleged that the defendants sold them the wrong
shares, because the Class B shares were subject to higher
fees and commissions than the Class A shares.

On April 27, 2001, the defendants re moved the law suit
from state court to the United States District Court for the
Southern District of Alabama, asserting that the district
court had subject matter jurisdiction over the case pursuant
to the SLUSA. Three days later, the defendants filed a
motion to dismiss Behlen's complaint. Behlen subse quently
filed an amended complaint, in which heasserted the same
state law claims, deleted the daims for misrepresentation
and suppression, and added claims for money had and
[*1090] received and for an accounting. Behlen also
removed all explicit references to any fraudulent activity by
the defendants. He argued that the SLUSA was no longer
applicable to his claims and filed a motion to remand the
case to state court.

The district court ultimately denied Behlen's motion to
remand and granted the defendants' motion to dismiss the
action, dismissing the class-wide claims with prejudice and
Behlen's individual claims without prejudice. This appeal
followed.

A4

STANDARD OF REVIEW

We review the denial of a motion to remand de novo.
Butero v. Royal Maccabees Life Ins. Co., 174 F.3d 1207, 1211
(11th Cir. 1999). We also "review| | de novo the dismissal of
a complaint pursuant to [Federal Rule of Civil Procedure]
12(b)(6)." Oxford Asset Mgmt., Ltd. v. Jaharis, 297 F.3d 1182,
1187 (11th Cir. 2002).

DISCUSSION
I. Removal Jurisdiction

We first address whether the district courthad removal
jurisdictionover this action. Although Behlen asserted only
state law claims in his original complaint, the defendants
removed the case to the district court based upon their
belief that Behlen actually alleged violations of federal
securities laws, which fell within the scope of the SLUSA.

Generally, whether an action raises a federal question
"is governed by the 'well-pleaded complaint rule,’ which
provides that federal jurisdiction exists only when a federal
question is presented on the face of the plaintiff's properly
pleaded complaint." Caterpillar Inc. v. Williams, 482 U.S. 386,
392, 107 S. Ct. 2425, 96 L.Ed.2d 318 (1987). Thus, the
plaintiff is "the master of the claim ... [and] may avoid
federal jurisdiction by exclusive reliance on state law." Id.
Furthermore, "a case may not be removed to federal court
on the basis of a federal defense, including the defense of
pre-emption, even if the defense is anticipated in the
plaintiff's complaint, and even if both parties concede that
the federal defense is the only question truly at issue." Id. at
393, 107 S. Ct. 2425.

The Supreme Court, however, has recognized "an
'independentcorollary' to the well-pleaded complaint rule,
knownas the 'complete pre-emption' doctrine." Id. (citation
omitted). The Court explained,

On occasion, the Court has concluded
that the pre-emptive force of a statute is
so extraordinary that it converts an
ordinary state common-law complaint
into one stating a federal claim for
purposes of the well-pleaded complaint
rule. Once an area of state law has been
completely pre-empted, any claim
purportedly based on that pre-empted
state law is considered, from its inception,
a federal claim, and therefore arises
under federal law.

Id. (citation omitted) (internal quotation marks omitted).

Thus, whether a district court has removal jurisdiction
over a state law case alleging securities fraud depends upon
whether the claims fall within the scope of the SLUSA and
are therefore preempted. In making this determination, it
is helpful to consider the SLUSA and its historical context.

Congress passed the Private Securities Litigation
Reform Act of 1995 (PSLRA), which established uniform
standards for class actions alleging securities fraud. The
procedural reforms enacted by the PSLRA were intended to
prevent plaintiffs [*1091] from bringing "strike suits" in

’ A strike suit is defined as "[a] suit... often based on
no valid claim, brought either for nuisance value or as
leverage to obtain a favorable or inflated settlement."
Black's Law Dictionary 1448 (Bryan A. Gamer ed., 7th ed.

A6é

securities matters. H.R. Conf. Rep. No. 105-803, at 13 (1998)
(discussing the PSLRA). Congress found that the high costs
of defending strike suits often forced defendants to settle
meritless class actions. H.R. Conf. Rep. No. 104-369, at 31
(1995), reprinted in 1995 US.C.C.A.N. 679, 730. The PSLRA
addressed this problem by instituting heightened pleading
requirements for class actions alleging fraud in the sale or
purchase of national securities.’ Riley v. Merrill Lynch,

1999).
? Section 78u-4 provides in relevant part,

(1) Misleading statements and omissions
In any private action arising under this chapter in
which the plaintiff alleges that the defendant--
(A) made an untrue statement of a material fact; or
(B) omitted to state a material fact necessary in order
to make the statements made, in the light of the
circumstances in which they were made, not
misleading;
the complaint shall specify each statement alleged to have
been misleading, the reason or reasons why the statement
is misleading, and, if an allegation regarding the statement
or omission is made on information and belief, the
complaint shall state with particularity all facts on which
that belief is formed.

(3) Motion to dismiss; stay of discovery
(A) Dismissal for failure to meet pleading
requirements
In any private action arising under this chapter, the
court shall, on the motion of any defendant, dismiss
the complaint if the requirements of paragraphs
(continued...)

A7

Pierce, Fenner & Smith, Inc., 292 F.3d 1334, 1340 (11th Cir.),
cert. denied, 71 U.S.L.W. 3178 (U.S. Oct. 15, 2002) (No. 02-
378). The PSLRA also required a mandatory stay of
discovery until the district court could determine the legal
sufficiency of the class action claims. See 15 U.S.C. § 78u-

4(b)(3)(B).

By 1998, however, it became apparent to Congress that
the objectives of the PSLRA were being frustrated, because
plaintiffs were evading its heightened pleading
requirements by bringing suit in state court rather than
federal court. Securities Litigation Uniform Standards Act
of 1998, Pub. L. No. 105-353, § 2(2)-(3), 112 Stat. 3227, 3227;
Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101, 108
(2d Cir. 2001) (noting that "litigants were able to assert
many of the same causes of action, butavoid the heightened
procedural requirements instituted in federal court").
Congress thus resolved that in order to prevent certain State
private securities class action lawsuits alleging fraud from
being used to frustrate the objectives of the Private
Securities Litigation Reform Act of 1995, it is appropriate to
enact national standards for securities class action lawsuits
involving nationally traded securities, while preserving the

? (...continued)

(1) and (2) are not met

(B) Stay of discovery

In any private action arising under this chapter, all
discovery and other proceedings shall be stayed
during the pendency of any motion todismiss, unless
the court finds upon the motion of any party that
particularized discovery is necessary to preserve
evidence or to prevent undue prejudice to that party.

15 U.S.C. § 78u-4(b)(1), (3).

A8

appropriate enforcement powers of State securities
regulators and not changing the current treatment of
individual lawsuits.

Pub. L. No. 105-353, § 2(5).

As a result, Congress passed the SLUSA, which
amended the Securities Act of 1933 and the Securities
Exchange Act of 1934 and made federal court, with limited
exceptions, the sole venue for class actions alleging fraud in
the purchase and sale of [*1092] covered securities? Riley,

* The SLUSA amended the 1933 Act to provide as
follows:

(b) Class action limitations
No covered class action based upon the statutory
or common law of any State or subdivision
thereof may be maintained in any State or
Federal court by any private party alleging-
(1) an untrue statement or omission of a material
fact in connection with the purchase or sale of a
covered security; or
(2) that the defendant used or employed any
manipulative or deceptive device or contrivance
in connection with the purchase or sale of a
covered security.

(c) Removal of covered class actions
Any covered class action brought in any State
court involving a covered security, as set forth in
subsection (b), shall be removable to the Federal
district court for the district in which the action
is pending, and shall be subject to subsection (b).

(continued...)

AY

292 F.3d at 1341. Congress further mandated that such
class actions wou'd be governed by federal law rather than
state law. See H.R. Conf. Rep. No. 105-803, at 13. To that
end, the SLUSA preempts certain state law claims, allows
for removal of state actions to federal court, and requires
immediate dismissal of "covered lawsuits." Riley, 292 F.3d
at 1341.

A party seeking to remove an action to federal court
pursuant to the SLUSA bears the burden of showing that
"(1) the suit is a ‘covered class action,’ (2) the plaintiffs'
claims are based on state law, (3) one or more 'covered
securities' has been purchased or sold, and (4) the defendant
misrepresented or omitted a material fact 'in connection
with the purchase or sale of such security.'""" Id. at 1342
(emphasis omitted). The district court found that each of
these requirements had been met and that the action was
therefore removable. Behlen, however, argues that the case
was not removable, because the action was not a "covered
class action" and the misconduct alleged in the complaint
was not "in connection with" the sale or purchase of a
security.

A. "Covered Class Action"

Behlen argues that his case was not removable, because
it was not a "covered class action." Behlen points to the
statutory language of the SLUSA, which provides that "[nJo
covered class action based upon the Statutory or common
law of any State or subdivision thereof may be maintained in
any State or Federal court by any private party." 15 U.S.C.

* (...continued)
15 U.S.C. § 77p(b)-(c). An identical amendment was made
to the 1934 Act. See id. § 78bb(f)(1)-(2).

A10

§§ 77p(b), 78bb(f)(1) (emphasis added). Behlen contends
that at the time of removal the case was not maintained as
a class action, because the state court had not determined
whether the case should proceed in a class-wide fashion.

We find no meritin Behlen's argument and believe that
it is based upon a misreading of the statute. The SLUSA
does not require that an action be "maintained as a class
action" before it can be removed; rather, itmerely provides
that no class action falling within the scope of its coverage
can be maintained in a state or federal court, which means
that dismissal of a "covered class action" is required. Prager
v. Knight/Trimark Group, Inc., 124-F. Supp. 2d 229, 231
(D. N.J.2000).

The SLUSA defines a "covered class action" as

any single lawsuit in which .. . damages
are sought on behalf of more than 50
persons or prospectiveclass members, and
questions of law or fact common to those
persons or members of the prospective
class, without reference to issues of
individualized reliance on an alleged
misstatement or omission, predominate
[*1093] over any questions affecting only
individual persons or members.

15 U.S.C. §§ 77p(f)(2)(A)(i)(I), 78bb(f)(5)(B)(i)() (emphasis
added). We thus believe that it is clear from the statutory
language that prospective class actions are removable to
federal court even if the state court has not determined
whether the action should go forward as a class action.
Were we to find that a class action must be "maintained" as
such before it is subject to removal under the SLUSA, we

All

essentially would require that the action be certified in state
court before it could be removed to federal court. Nothing
in the statutory language of the SLUSA, however, suggests
that certification prior to removal is required. Indeed,
requiring certification prior to removal would frustrate the
objectives of the SLUSA rather than further them. The
SLUSA's provisions "were designed to enable securities
defendants to obtain early dismissal of frivolous class
actions, and thereby avoid the high expense of discovery."
Riley, 292 F.3d at 1341. Requiring certification prior to
removal would entail potentially lengthy and expensive
pretrial practice and discovery in state court, regardless of
the merits of the action. We believe that sucha prospect is
contrary to the stated objectives of the SLUSA.

B. "In Connection with"

Behlen next argues that the district court's exercise of
removal jurisdiction over his case was improper, because
the misconduct alleged in the complaint did not occur "in
connection with" the sale or purchase of securities.

The SLUSA does not define the phrase "in connection
with the purchase or sale of a covered security." The
Supreme Court has not had occasion to interpret this phrase
in the context of the SLUSA, but has interpreted the
identical phrase as it appears in Rule 10b-5, which
implements section 10(b) of the 1934 Act.* See Blue Chip

* Section 10(b) makes it "unlawful for any person...

[t]o use or employ, in connection with the purchase or sale
of any security .. ., any manipulative or deceptive device or
contrivance in contravention of such rules and regulations
as the [SEC] may prescribe." Securities Exchange Act of
(continued...)

A12

Stamps v. Manor Drug Stores, 421 U.S. 723, 737-38, 95 S. Ct.
1917, 44 L.Ed.2d 539 (1975). Thus, in Riley, we looked to
Blue Chip when we determined that Congress intended the
phrase "in connection with" to have the same meaning
under the SLUSA that it has under section 10b-5, because
the SLUSA was enacted as an amendment to the 1933 and
1934 Acts. 292 F.3d at 1342-43; see also Green v. Ameritrade,
Inc., 279 F.3d 590, 597 (8th Cir. 2002).

In Blue Chip, the Supreme Court held that there is no
cause of action under section 10b-5 unless a challenged
misrepresentation or omission caused the plaintiff to buy or
sell a particular stock. 421 U.S. at 748-49, 95 S. Ct. 1917.
Based upon that holding, the Eighth Circuit held in Green
that the SLUSA did not preempt a state law breach of
contract claim where the plaintiff failed to allege that the
defendants made misrepresentations that caused them to
buy a covered security. 279 F.3d at 598-99. Green filed a
breach of contract action in state court, alleging that he
contracted with Ameritrade to receive "real time" stock
quotes on Ameritrade's Web site, but the quotes listed on
the site actually were not in real time. Id. at 593-94. The
court found that Green did not allege in his amended
complaint that the delayed quotes caused him to buy or
[*1094] sell a covered security; rather, he merely alleged
that he contracted for a service, but did not receive the kind
of information for which he believed he was paying. Id. at
598-99.

* (...continued)
1934 § 10(b), 15 U.S.C. § 78j(b). Rule 10b-5 prohibits the use
of "any device, scheme, or artifice to defraud" or any other

‘ "act, practice, or course of business" that "operates ...as a

fraud or deceit." 17C.F.R. § 240.10b-5.

A13

In contrast to the plaintiff in Green, Behlen specifically
alleged that the defendants "negligently, recklessly or
intentionally misrepresented the fact that Plaintiff and the
class would be sold Class A shares," but "sold tothem more
expensive Class Bshares." Additionally, he alleged that the
defendants "suppressed the true facts concerning the
repeated sales to them of Class B Shares" and "concealed
and suppressed the illegality of their conduct ... and
continued to sell them Class B shares." It is clear that the
crux of the complaint was that the defendants either
misrepresented or omitted crucial facts about the Class A
and Class B shares, thus causing him and the class to invest
in inappropriate securities. Behlen argues, however, that
these wrongful acts were not made "in connection with" the
sale of securities, but merely were incidental to the sale of
the securities.

We believe Behlen's claims are similar to the daims
asserted by the plaintiffs in Dudek v. Prudential Securities,
Inc., 295 F.3d 875 (8th Cir. 2002). In that case, the plaintiffs
filed a class action suit in state court alleging that the
defendants improperly marketed tax-deferred annuities to
accounts that already enjoyed tax-deferred status. Id. at 877.
The plaintiffs argued that the annuities were inappropriate
investments, "because tax-deferred accounts did not need
the tax benefits, and therefore the extra fees and costs that
tax-deferred annuities entail[ed] were a waste of the
investors' money." Id. The plaintiffs acknowledged that the
annuities at issue were "covered securities," butargued that
their claims were not preempted by the SLUSA because
they were based upon the defendants excessive fees rather
than misconduct "in connection with" the sale of securities.
Id. at 878. The Eighth Circuit rejected the plaintiffs’
argument that they did not allege fraud, misrepresentation,
or an omission of material fact; it agreed with the district

Al4

court that the gravamen of the plaintiffs' complaint
"involve[d] an untrue statement or substantive omission of
a material fact in connection with the purchase or sale of a
covered security." Id. at 879 (internal quotation marks
omitted).

In the instant case, although Behlen argues that the
excess fees and commissions paid by the class members
were incidental to the sale of the securities, it seems certain
that the very reason they were sold the Class B shares was
because those shares were subject to the excess fees and
commissions. Thus, the fees and commissions were not
incidental to the sale of the securities, but were an integral
part of the transactions. To.the extent that the defendants
misrepresented which shares would be sold to the class,
those misrepresentations were made "in connection with"
the sale of the shares.”

> In support of his argument, Behlen relies heavily
upon SEC v. Zandford, 238 F.3d 559 (4th Cir. 2001), rev'd, 535
U.S. 813, 122 S. Ct. 1899, 153 L.Ed.2d 1 (2002). That decision
was reversed, however, by a unanimous Supreme Court.
See Zandford, 535 U.S. 813, 122 S. Ct. 1899, 153 L.Ed.2d 1.
The Court noted that the SEC always has adopted a broad
reading of the phrase "in connection with the purchase or
sale of any security." Id. at 1903. The Court stated, "While
the statute must not be construed so broadly as to convert
every common-law fraud that happens to involve securities
into a violation of § 10(b), neither the SEC nor this Court has
ever held that there must be a misrepresentation about the
value of a particular security in order to run afoul of the
Act." Id. (citation omitted). The Court went on to state that
the securities sales and the broker's fraudulent acts were not
independent events, but, in fact, coincided with each other
because each sale was made to further the broker's

A15

[*1095] Having determined that the action was a
"covered class action" alleging misrepresentation "in
connection with" thesale of covered securities, we conclude
that the removal of the case pursuant to the SLUSA was
proper. Furthermore, once the case was removed to the
district court, the SLUSA required that it be dismissed.°

II. Remand

We now address whether the district courtshould have
remanded the case to state. court after Behlen amended his
complaint. Behlen argues that even if the action was
removable to district court, the court should have remanded
the case back to state court after he amended his com plaint.
Behlen admits that he amended the complaint to delete all

fraudulent scheme. Id. at 1904.

* Behlen further argues that the district court erred in
dismissing the class-wide claims with prejudice. Behlen
characterizes the district court's dismissal of the class-wide
claims as aruling that theclass action could notbe certified.
The district court, however, did not determine whether
Behlen satisfied the certification requirements of Federal
Rule of Civil Procedure 23. The district court simply
adhered to the text of §§ 77p and 78bb and determined that
Behlen's class-wide claims were barred.

Because Behlen's case was a “covered class action"
asserting state law claims that fell within the scope of the
SLUSA, the district court had no choice but to dismiss the
class-wide claims. Furthermore, the claims were subject to
dismissal with prejudice, because Behlen could not recover
on any state law claim alleging that he and the class were
wrongfully induced to buy the Class B shares.

Al16

claims and allegations that might be deemed to fall within
the scope of the SLUSA. Absent allegations of
misrepresentation, he argues, the complaint no longer
contained allegations of the kind of misconduct covered by
federal securities laws. Behlen thus contends that the
district court no longer had subject matter jurisdiction over
the case and should have remanded the case to state court.

In Poore v. American-Amicable Life Insurance Co. of Texas,
218 F.3d 1287, 1290-91 (11th Cir. 2000), we joined our sister
circuits in holding that if a district court has subject matter
jurisdiction over a diversity action at the time of removal,
subsequent acts do not divest the court of its jurisdiction
over the action. Accordingly, we held that even though the
plaintiffs amended their complaint to red uce the amount in
controversy, the district court still retained diversity
jurisdiction over the actionand "committed reversible error
by remanding based on Appellees' post-removal amended
complaint." Id. at 1292.

In the instant case, the district court had federal
question jurisdiction over Behlen's original complaint,
because the claims therein were preempted by the SLUSA.
Pursuant to 28 U.S.C. § 1367(a), the court also had
supplemental jurisdiction over the remaining state law
claims in the original complaint. The court had discretion
to retain jurisdiction over the state law claims even after
Behlen amended the complaintto remove any federal cause
of action. See Porsche Cars N. Am., Inc. v. Porsche.Net, 302
F.3d 248, 256 (4th Cir. 2002); Mauro v. S. New England
Telecomms., Inc., 208 F.3d 384, 388 (2d Cir. 2000) (per
curiam). Moreover, it was proper for the court to retain
jurisdiction over Behlen's amended complaint, because,
despite his removal of the allegations that would bring his

A17

in March 1997 and again in September 1997 — for driving
under the influence of alcohol, although he had not been
convicted of either offense. E.T. admitted that he had
continued to drive home on occasion after he had "had two
or three beers at the Stadium Grill... I mean, it's kind of
hard to stop at Applebee's or wherever and not drive to get
{ home whether you have one or twenty."

A representative of DHR testified that, although DHR's
policy was to seek a relative for placement when an
appropriate relative could be located, in the representative's
five and one-half years of experience with DHR she had
never known DHR to remove a child from a home after the
child had been placed in the home as an infant and had
remained in the home for three years.

A.M.A. is now five and one-half years old. Every
witness testified that the child is a happy, loving child. The
trial court, in its discretion, awarded custody of A.M.A. to
S.P., who has had physical custody of the child since she
was an infant and who has provided the only home, and in
a real sense, has been the only mother, the child has ever
known.

Because the lead opinion in W.T.M. II considered this
case to involve a dependency proceeding, our mandate that
the trial court apply a "best-interests" standard on remand
was consistent with Ala. Code 1975, § 12-15-71(a). That
statute provides, in pertinent part:

"If a child is found to be dependent, the court may
make any of the following orders of disposition to
protect the welfare of the child:

i

A18

APPENDIX B

IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVEN TH CIRCUIT

FILED
U.S. COURT OF APPEALS
ELEVENTH CIRCUIT

JAN 13 2003

THOMAS K. KAHN
CLERK

No. 01-16424-DD

CHARLES H. BEHLEN,
individually and on behalf of a
class of similarly situated persons
and entities,

Plaintiff-Appellant,
versus

MERRILL LYNCH,
PHOENIX INVESTMENT PARTNERS, LTD.,

Defendants-Appellees.

On Appeal from the United States District Court for the
Southern District of Alabama

Al19

ON _ PETITION(S) FOR REHEARING AND PETITION(S)
FOR REHEARING EN BANC
(Opinion , 11th Cir.,19_, F.2d

cancel

Before: WILSON, RONEY and ALARCON*, Circuit Judges.
PER CURIAM:

The Petition(s) for Rehearing are DENIED and no member
of this panel nor other Judgein regularactive service on the
Court having requested that the Court be polled on
rehearing en banc (Rule 35, Federal Rules of Appellate
Procedure; Eleventh Circuit Rule 35-5), the Petition(s) for
Rehearing En Banc are DENIED.

ENTERED FOR THE COURT:

s/ Charles R. Wilson
UNITED STATES CIRCUIT JUDGE

ORD-42
(6/95)

*Honorable Arthur L. Alarcon, U.S. Circuit Judge for the
Ninth Circuit, sitting by designation.

A20

APPENDIX C

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ALABAMA
SOUTHERN DIVISION

FILE COPY

FILED AUG 27 '01 PM 4:09 USDCALS

CHARLES H. BEHLEN,
Plaintiff,

V. : CIVIL ACTION 01-0298-M

MERRILL LYNCH & CO.,
INC., et al.,

Defendants.

MEMORANDUM OPINION AND ORDER .

This action comes before the Court on Defendants'
Motion to Dismiss (Docs. 2-3), Plaintiff's Motion to Remand
(Doc. 15), Defendants' Motion to Dismiss Plaintiff's First
Amended Complaint (Docs. 16-17), Defendants' Brief
Opposing Plaintiff's Motion to Remand (Doc. 21), Plaintiff's
Response to Defendants! Motion to Dismiss (Doc. 22),
Plaintiff's Reply to Defendants' Brief regarding Remand
(Doc. 25), and Defendants' Reply Brief Regarding Dismissal
(Doc. 26). Jurisdiction has been invoked in this Courtunder
The Securities Litigation Uniform Standards Act of 1998

A21

(hereinafter SLUSA). 15 U.S.C. §§ 77p, 78bb(f). The parties
consented in writing to haveall matters and proceedings in
this action conducted by the undersigned Magistrate Judge
pursuant to 28 US.C. § 636(c) (see Doc. 14). After
consideration, Defendants' M otion to Dismiss is GRANTED
and this action is DISMISSED.

The facts of this action, briefly, are as follows.
_ Beginning on November 5, 1999, Plaintiff Charles H. Behlen
purchased shares in the Phoenix-Engemann Aggressive
Growth Fund, and from other affiliated Phoenix funds from
Defendants Merrill Lynch & Co, Inc and Phoenix
Investment Partners, Ltd. (Doc. 1, Complaint 4 1,11).' On
March 15, 7601, Behlen brought a civil action in the Mobile
County Circuit Court to recover monetary damages which
accrued from the purchase of those Growth Fund shares
(Doc. 1, 4 1). Plaintiff raised sevenclaims in that complaint:
breach of contract, breach of implied covenants and duties,
breach of fiduciary duty, unjust enrichment, suppression,
misrep‘esentation, and negligence and/or wantonness;
Behlen’'s action is styled as a class action complaint (Doc. 1,
Complaint). On April 27, 2001, Defendants removed the
action to this Court, asserting SLUSA jurisdiction (Doc. 1).
Plaintiff subsequently filed an amended com plaint (Doc. 9).
Defendants now seek to have this action dismissed while
Plaintiff would have the action remanded back to the state
court.

" The Court will refer to Merrill Lynch and Phoenix
Investment Partners, Ltd. collectively as Defendants.

The Court first needs to determine whether it properly
has jurisdiction over this matter. In its removal petition,
Defendant alleges jurisdiction under 15 US.C. §§ 77p,

A22

78bb(f) and that this action is removable pursuant to 28
U.S.C. § 1441(b) (Doc. 1). In a removal action, the party
assertingjurisdiction hasthe burden of establishing proof of
it by a preponderance of the evidence. McNutt v. General
Motors Acceptance Co. of Indiana, Inc., 298 U.S. 178 (1936). In
a removal action, that burden is upon the defendant. Wilson
v. Republic Iron & Steel Co., 257 U.S. 92 (1921). Removal is a
Statutory remedy which must be narrowly construed so as
to limit federal jurisdiction. Shamrock Oil & Gas Corp. v.
Sheets, 313 U.S. 100 (1941); Robinson v. Quality Ins. Co., 633
F. Supp. 572 (S.D. Ala. 1986).

Before the jurisdictional issue can be settled, the Court
must determine which complaint to examine. Behlen
asserts that the Court should look at theamended complaint
while Defendants argue that the original complaint is the
appropriate pleading to consider. The Eleventh Circuit
Court of Appeals has held that "the district court must
determine whether it had subject matter jurisdiction at the
time of removal." Poore v. American-A micable Life Ins. Co. of
Texas, 218 F.3d 1287, 1290-91 (11th Cir. 2000). The Poore
Court went on to say that events occurrin g after removal...
do not oust the district court's jurisdiction." Poore, 218 F.3d
at 1291; see also St. Paul Mercury Indem. Co. v. Red Cab Co.,
303 U.S. 283, 287 (1938). On the basis of Poore, the Court will
examine the original complaint to determine if jurisdiction
existed at the time of removal.

The Court notes, summarily, that Congress, in 1995,
passed the Private Securities Litigation Reform Act as a
means of limiting a plaintiff's ability to bring class action
securities lawsuits. To bypass the new restrictions,
plaintiffs began filing securities actions in state courts. In
1998, Congress passed SLUSA to prevent this practice.

2 ee

A23

Under SLUSA,

[n]o covered class action based upon
the statutory or common law of any State
or subdivision thereof may be maintained
in any State or Federal court by any
private party alleging —

(1) an untrue statement or
omission of a material fact in
connection with the purchase or sale
of a covered security; or

(2) that the defendant used or
employed any manipulative or
deceptive device or contrivance in
connection with the purchase of sale
of a covered security.

15 U.S.C. § 77p(b). Any state action which meets these
criteria shall be removed "to the Federal district court for the
district in which the action is pending." 15 U.S.C. § 77p(c).
Defendants removed this action to this Court, citing these
Statutes.

To determine if this Court enjoys jurisdiction over this
matter, it will be necessary to examine § 77p(b) more
closely. The term covered class action has been defined to
include a single lawsuit "in which damages are sought on
beha't of more than 50 persons or prospective class
members, and questions of law or fact common to those
persons or members of the prospective class
predominate over any "questions affecting only individual
persons or members." 15 U.S.C. § 77p(f) (2) (A) (i) (I). In the
complaint, Behlen alleges that "the class exceeds several
thousand members" (Doc. 1, Complaint, § 19) . The
complaint further states that "[t]here are questions of law

a aac ccaaea ener

A24

and fact common to members of the class which have
resulted in a common pattern of damage sustained. These
questions of law and fact predominate over any questions
affecting individual class members." Id. at 4 22. Plaintiff
seeks both compensatory and punitive damages. Id. at p.9,
4 c. The Court finds that this action is a covered class
action.

The definition of covered security includes "a security
issued by an investment company that is registered, or that
has filed a registration statement, under the Investment
Company Act of 1940." 15 U.S.C. § 77r(b) (2); see also 15
U.S.C. § 77p(f) (3). Defendants assert that"[t]he Funds are,
of course, registered under the Investment Company Act of
1940, and the Class B shares purchased by Plaintiff and the
class were issued by the Funds" (Doc. 1, 4 12). Though the
Court has found no evidence in the record to support the
assertion, Behlen has not challenged it. The Court finds that
the securities which are the su bject of this action fall within
the definition of covered securities.

The Court now must make a determination as to
whether the remainder of § 77p(b) is satisfied. This requires
an assertion of "an untrue statement or omission of a
material fact" or that Defendants "used or employed any
manipulative or deceptive device or contrivance in

connection with the purchase or sale of a covered security."
15 U.S.C. § 77p(b) (1, 2).

In bringing this action, Behlen, in the opening
paragraphs of the complaint, makes the following
assertions:

1. This is a class action brought by
Plaintiff Charles H. Behlen "Behlen") on

——s oe es

A25

behalf of a class composed of all
individuals and entities who were
wrongfully sold and charged excessive
commission on Class B shares in the
Phoenix-Engemann Aggressive Growth
Fund ("Growth Fund") and other
"affiliated Phoenix funds," by Merrill
Lynch & Co., Inc. and Phoenix
Investments Partners, Ltd., along with

_other possible unknown parties, when

they were eligible for reduced sales
charges of commissions from the
purchase of Class A shares in the same.
2. Defendants wrongfully sold to
Plaintiff and the class Class B shares in
the Growth Funds and other "affiliated
Phoenix funds" when they should have
sold to Plaintiff and the class Class A
shares at reduced sales charges and

‘commissions. The Defendants knew or

should have known that Plaintiff and the
class were eligible to purchase Class A
shares for reduced sales charges and
commissions, but deliberately sold to
Plaintiff and the class the Class B shares
so as to wrongfully charge higher
commissions for such transactions.

3. Recognizing that they should have
sold to Plaintiff and the class members
Class A shares and not Class B shares, the
Defendants concealedand suppressed the
illegality of their conduct from the
Plaintiff and the class and continued to
sell them Class B shares at higher
commissions and charges.

A26

4. Defendants' wrongful and
unconscionable conduct constitutes a
pattern and practice of intentional,
willful, wanton, reckless, negligent
and/or grossly negligent conduct.

Doc. 1, Complaint. This language, which provides clear
evidence of Behlen's assertion of Defendants' misfeasance,
would appear to satisfy the requirement of § 77p (b) .

Plaintiff asserts, though, that Defendants have not
proven that the transactions were "in connection with" the
purchase or sale of the underlying securities. More
specifically, Behlen argues that he is not challenging the
securities; rather, his problem is "with the overcharging of
sales commissionsand fees" (Doc. 22, p. 26). Plaintiff asserts
that his purchase of ap proximately $500,000 worth of shares
was split into three separate purchases, rather than one
large purchase, which resulted in higher commissions and
fees charged to him (Doc. 22, p.4). Additionally, Behlen has
asserted that because of the large volume of shares that he
was purchasing, he should have been acquiring Class A
shares rather than the Class B shares which he actually
purchased (id. at p. 5). Plaintiff maintains that these
additional commissionsand fees, for which she has brought
this action, do not fall within the "in connection with"
language of SLUSA.

Plaintiff has pointed to several cases as support for his
argument. See, e.g., Green v. Ameritrade, Inc., 120 F. Supp. 2d
795 (D. Neb. 2000) (SLUSA did not preempt subscribers'
state law claims against internet securities information
service's failure to provide "real time" market quotes as
promised); Abada v. Charles Schwab & Co., Inc., 127 F.Supp.
2d 1101 (S.D. Cal. 2000) (SLUSA did not preempt investors'

i i be “ e

— =

A27

claim that stockbroker failed to deliver on assertion of
immediate online trade transactions); Shaw v. Charles Schwab
_ &Co., Inc., 128 F.Supp. 2d 1270 (C.D. Cal. 2001) (GSLUSA did
not preempt claim that stock broker's promise resulted in
selection of that broker, as opposed to other brokers, as
claim did not concern selection of particular securities). The
Court does not, however, find these cases instructive
because the plaintiffs are not claiming that they got the
wrong securities; while their lawsuits revolved around the
purchase of securities, the securities themselves were only
tangentially related to the actual claim.

In this action, the heart of Plaintiff's claim is that he did
not get the shares that he now believes that he should have
received. Behlen repeatedly states that he should have been
purchasing Class A shares rather than the Class B shares
because he could have acquired them and paid less money
for fees and commissions.

The Court finds that Defendants have satisfied their
burden of establishing that this Court has jurisdiction over
this action pursuant to SLUSA. Accordingly, Plaintiff's
Motion to Remand is DENIED (Doc. 15).

Defendants have also sought to have this action
dismissed. The Court notes that Plaintiff has not provided
any indication that he wishes to continue with this action in
the event that this Court determines that it is governed by
SLUSA. Because Behlen has not indicated a preference of
pursuing his own individual claims in either the state or
federal courts, this Court will assume that he would prefer

the state court as that was where the action was originally
filed.

A28

Having reached the determination that this action falls
within the language of SLUSA, and finding that SLUSA
requires such action, the Court GRANTS Defendant's
Motion to Dismiss (Doc. 2). This action is DISMISSED
WITH PREJUDICE as to the class action claims and
DISMISSED WITHOUT PREJUDICE as to Behlen's
individual claims.

DONE this 27th day of August, 2001.

s/ Bert W. Milling, Jr.

BERT W. MILLING, JR.
UNITED STATES MAGISTRATE JUDGE

JUDGMENT ENTERED
ON DOCKET
Date _ 8/31/01 s/ [illegible initials]
CHARLES R. DIARD, JR. CLERK

U.S. DISTRICT COURT
SOU. DIST. ALA.
FILED THIS THE
27TH DAY OF AUGUST,
2001. JUDGMENT ENTRY ____
NO. _10034-D
CHARLES R. DIARD, JR., CLERK

BY s/ Cynthia [illegible]
DEPUTY CLERK

A29
APPENDIX D
Public Law 105-353
105th Congress
An Act

To amend the Securities Act of 1933 and the Securities
Exchange Act of 1934 to limit the conduct of securities class

actions under State law, and for other purposes. [Nov. 3,
1998 [S. 1260]]

Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,

SECTION 1.SHORT TITLE. [Securities Litigation Uniform
Standards Act of 1998. 15 USC 78a note.]

This Act may be cited as the "Securities Litigation
Uniform Standards Act of 1998".

SEC. 2. FINDINGS. [15 USC 78a note]

The Congress finds that —

(1) the Private Securities Litigation Reform Act of 1995
sought to prevent abuses in private securities fraud
lawsuits;

(2) since enactment of that legislation, considerable
evidence has been presented to Congress that a number of
securities class action lawsuits have shifted from Federal to
State courts;

(3) this shift has prevented that Act from fully achieving
its objectives;

A30

(4) State securities regulation is ofcontinuing importance,
together with Federal regulation of securities, to protect
investors and promote strong financial markets; and

(5) in order to prevent certain State private securities
class action lawsuits alleging fraud from being used to
frustrate the objectives of the Private Securities Litigation
Reform Act of 1995, it is appropriate to enact national
standards for securities class action lawsuits involving
nationally traded _ securities, while preserving the
appropriate enforcement powers of State securities
regulators and not changing the current treatment of
individual lawsuits.

TITLE I—SECURITIES LITIGATION UNIFORM
STANDARDS

SEC. 101. LIMITATION ON REMEDIEIES.

(a) AMENDMENTS TO THE SECURITIES ACT OF 1933. —
(1) AMENDMENT. — Section 16 of the Securities Act of
1933 (15 U.S.C. 77p) is amended to read as follows:

"SEC. 16. ADDITIONAL REMEDIES; LIMITATION ON
REMEDIES.

"(a) REMEDIES ADDITION AL. — Except as provided in
subsection (b), therights andremedies provided by this title
shall be in addition to any and all other rights and remedies
that may exist at law or in equity.

A31

"(b) CLASS ACTION LIMITATIONS. — No covered class
action based upon the statutory or common law of any State
or subdivision thereof may be maintained in any State or
Federal court by any private party alleging —

"(1) an untrue statement or omission of a material fact
in connection with the purchase or sale of a covered
security; or

"(2) that the defendant used or employed any
manipulative or deceptive device or contrivance in
connection with the purchase or sale of a covered
security.

"(c) REMOVAL OF COVERED CLASS ACTIONS. — Any
covered class action brought in any State court involving a
covered security, as set forth in subsection (b), shall be
removable to the Federal district court for the district in
which the action is pending, and shall be subject to
subsection (b).

"(d) PRESERVATION OF CERTAIN ACTIONS. —
"(1) ACTIONS UNDER STATE LAW OF STATE OF
INCORPORATION. —

"(A) ACTIONS PRESERVED. — Notwithstanding
subsection (b) or (c), acovered class action described
in subparagraph (B) of this paragraph that is based
upon the statutory or common law of the State in
which the issuer is incorporated (in the case of a
corporation) or organized (in the case of any other
entity) may be maintained in a State or Federal court
by a private party.

"(B) PERMISSIBLE ACTIONS. —A covered class
action is described in this subparagraph if it
involves—

A32

"(i) the purchase or sale of securities by the issuer
or an affiliate of the issuer exclusively from or to
holders of equity securities of the issuer; or

"(ii) any recommendation, position, or other
communication with respect to the sale ofsecurities
of the issuer that —

"(I) is made by or on behalf of the issuer or an
affiliate of the issuer to holders of equity
securities of the issuer; and

"(II) concerns decisions of those equity holders
with respect to voting their securities, acting in
response to a tender or exchange offer, or
exercising dissenters’ or appraisal rights.

"(2) STATE ACTIONS. —

"(A) IN GENERAL. — Notwithstanding any other
provision of this section, nothing in this section may
be construed to preclude a State or political
subdivision thereof or a State pension plan from
bringing an action involving a covered security on its
own behalf, or as a member of aclass comprised solely
of other States, political subdivisions, or State pension
plans that are named plaintiffs, and that have
authorized participation, in such action.

"(B) STATE PENSION PLAN DEFINED. —For
purposes of this paragraph, the term 'State pension
plan' means a pension plan established and
maintained for itsemployees by the government of the
State or political subdivision thereof, or by any agency
or instrumentality thereof.

"(3) ACTIONS UNDER CONTRACTUAL
AGREEMENTS BETWEEN ISSUERS AND INDENTURE
TRUSTEES. — Notwithstanding subsection (b) or (c), a
covered class action that seeks to enforce a contractual
agreement between an issuer and an indenture trustee

A33

may be maintained in a State or Federal court by a party
to the agreement or a successor to such party.

"(4) REMAND OF REMOVED ACTIONS. —In an
action that has been removed froma State court pursuant
to subsection (c), if the Federal court determines that the
action may be maintained in State court pursuant to this
subsection, the Federal court shall remand such action to
such State court.

"(e) PRESERVATION OF STATE JURISDICTION. — The
securities commission (or any agency or office performing
like functions) of any State shall retain jurisdiction under
the laws of such State to investigate and bring enforcement
actions.

"(f) DEFINITIONS. —For purposes of this section, the
following definitions shall apply:

"(1) AFFILIATE OF THE ISSUER. — The term ‘affiliate
of the issuer' means a person that directly or indirectly,
through one or more intermediaries, controls or is
controlled by or is under common control with, the
issuer.

"(2) COVERED CLASS ACTION. —

"(A) IN GENERAL. — The term 'covered class action’
means —
"(i) any single lawsuit in which —

"(I) damages are sought on behalf of more
than 50 persons or prospective class members,
and questions of law or fact common to those
persons or members of the prospective class,
without reference to issues of individualized
reliance on an alleged misstatement or omission,
predominate over any questions affecting only
individual persons or members; or

A34

"(II} one or more named parties seek to
recover damages on a representative basis on
behalf of themselves and other unnamed parties
similarly situated, and questions of law or fact
common to those persons or members of the
prospective class predominate over any
questions affecting only individual persons or
members; or
"(ii) any group of lawsuits filed in or pending in

the same court and involving common questions of

law or fact, in which —

"(I) damages are sought on behalf of more
than 50 persons; and

"(II) the lawsuits are joined, consolidated, or
otherwise nroceed ac a sinole action for anv
purpose.

"(B) EXCEPTION FOR DERIVATIVE ACTIONS.
—Notwithstanding subparagraph (A), the term
‘covered class action' does not include an exclusively
derivativeaction brought by oneor more shareholders
on behalf of a corporation.

"(C) COUNTING OF CERTAIN CLASS MEMBERS.
—For purposes of this paragraph, a corporation,
investment company, pension plan, partnership, or
other entity, shall be treated as one person or
prospective class member, but only if the entity is not
established for the purpose of participating in the
action.

"(D) RULE OF CONSTRUCTION. — Nothing in this

paragraph shall be construed to affect the discretion of

a State court in determining whether actions filed in

such court should be joined, consolidated, or
otherwise allowed to proceed as a single action.

"(3) COVERED SECURITY.—The term ‘covered

security’ means a security that satisfies the standards for

A35

a covered security specified in paragraph (1) or (2) of
section 18(b) at the time during which it is alleged that
the misrepresentation, omission, or manipulative or
deceptive conduct occurred, except that such term shall
not include any debt security that is exempt from
registration under this title pursuant to rules issued by
the Commission under section 4(2).".

(2) CIRCUMVENTION OF STAY _ OF

DISCOVERY. -— Section 27(b) of the Securities Act of 1933
(15 U.S.C. 77z-1(b)) is amended by inserting after
paragraph (3) the following new paragraph:
"(4) CIRCUMVENTION OF STAY OF
DISCOVERY. — Upon a proper showing, a court may stay
discovery proceedings in any private action in a State
court as necessary in aid of its jurisdiction, or to protect
or effectuate its judgments, in an action subject to a stay
of discovery pursuant to this subsection.".

(3) CONFORMING AMENDMENTS. —Section 22(a)
of the Securities Act of 1933 (15 U.S.C. 77v (a)) is amended

(A) by inserting "except as provided in section 16
with respect to covered class actions," after "Territorial
courts,"; and

(B) by striking "No case" and inserting "Except as
provided in section 16(c), no case".

(b) AMENDMENTS TO THE SECURITIES EXCHANGE
ACT OF 1934. —
(1) AMENDMENT.-—Section 28 of the Securities
Exchange Act of 1934 (15 US.C. 78bb) is amended —
(A) in subsection (a), by striking "The rights and
remedies" and inserting "Except as provided in
subsection (f), the rights and remedies"; and
(B) by adding at the end the following new
subsection:

A36

"(f) LIMITATIONS ON REMEDIES. —

"(1) CLASS ACTION LIMITATIONS. —No covered
class action based upon the statutory or common law of
any State or subdivision thereof may be maintained in
any State or Federal court by any private party alleging

"(A) a misrepresentation or omission of a material
fact in connection with the purchase or sale of a
covered security; or

"(B) that the defendant used or employed any
manipulative or deceptive device or contrivance in
connection with the purchase or sale of a covered
security.

"(2) REMOVAL OF COVERED CLASS ACTIONS.
—Any covered class action brought in any State court
involving a covered security, as set forth in paragraph
(1), shall be removable to the Federal district court forthe
district in which the action is pending, and shall be
subject to paragraph (1).

"(3) PRESERVATION OF CERTAIN ACTIONS. —

"(A) ACTIONS UNDER STATE LAW OF STATE

OF INCORPORATION. —

"(i) ACTIONS PRESERVED. — Notwithstanding
paragraph (1) or (2), a covered class action
described in clause (ii) of this subparagraph that is
based upon the statutory or common law of the
State in which the issuer is incorporated (in the case
of a corporation) or organized (in the case of any
other entity) may be maintained in a State or
Federal court by a private party.

"(ii) PERMISSIBLE ACTIONS. — A covered class
action is described in this clause ifit involves —

"(I) the purchase or sale of securities by the
issuer or an affiliate of the issuer exclusively

A37

from or to holders of equity securities of the

issuer; Or

"(Il) any recommendation, position, or other
communication with respect to the sale of
securities of an issuer that —

"(aa) is made by or on behalf of the issuer or
an affiliate of the issuer to holders of equity
securities of the issuer; and

"(bb) concerns decisions of such equity
holders with respect to voting their securities,
acting in response to a tender or exchange offer,
or exercising dissenters’ or appraisal rights.

"(B) STATE ACTIONS. —

"(i) INGENERAL. — Notwithstanding any other
provision of this subsection, nothing in this
subsection may be construed to precludea State or
political subdivision thereof or a State pension plan
from bringing an action involving a covered
security on its own behalf, or as a member of a class
comprised solely of other States, political
subdivisions, or State pension plans that are named
plaintiffs, and that have authorized participation, in
such action.

"(ii) STATE PENSION PLAN DEFINED. — For
purposes of this subparagraph, the term ‘State
pension plan’ means a pension plan established and
maintained for its employees by the government of
a State or political subdivision thereof, or by any
agency or instrumentality thereof.

"C) ACTIONS UNDER CONTRACTUAL
AGREEMENTS BETWEEN ISSUERS AND
INDENTURE TRUSTEES. —Notwithstanding
paragraph (1) or (2), a covered class action that seeks
to enforce a contractual agreement between an issuer
and an indenture trustee may be maintained ina State

A38

or Federal court by a party to the agreement or a

successor to such party.

"(D) REMAND OF REMOVED ACTIONS. —In an
action that has been removed from a State court
pursuant to paragraph (2), if the Federal court
determines that the action may be maintained in State
court pursuant to this subsection, the Federal court
shall remand such action to such State court.

"(4) PRESERVATION OF STATE JURISDICTION. —
The securities commission (or any agency or office
performing like functions) of any State shall retain
jurisdiction under the laws of such State to investigate
and bring enforcement actions.

"(5) DEFINITIONS. [Applicability.] — For purposes of
this subsection, the following definitions shall apply:

"(A) AFFILIATE OF THE ISSUER. —The term
‘affiliate of the issuer' means a person that directly or
indirectly, through one or more intermediaries,
controls or is controlled by or is under common
control with, the issuer.

"(B) COVERED CLASS ACTION. — The term
‘covered class action' means —

"(i) any single lawsuit in which —

"(I) damages are sought on behalf of more
than 50 persons or prospective class members,
and questions of law or fact common to those
persons or members of the prospective class,
without reference to issues of individualized
reliance on an alleged misstatementor omission,
predominate over any questions affecting only
individual persons or members; or

"(II} one or more named parties seek to
recover damages on a representative basis on
behalf of themselves and other unnamed parties
similarly situated, and questions of law or fact

A39

common to those persons or members of the
prospective class predominate over any
questions affecting only individual persons or
members; or
"(ii) any group of lawsuits filed in or pending in
the same court and involving common questions of
law or fact, in which —
"(1) damages are sought on behalf of more
than 50 persons; and
"(II) the lawsuits are joined, consolidated, or
otherwise proceed as a single action for any
purpose.

"(C) EXCEPTION FOR DERIVATIVE ACTIONS.
— Notwithstanding subparagraph (B), the term
‘covered class action' does not include an exclusively
derivative action brought by one or more shareholders
on behalf of a corporation.

"(D) COUNTINGOF CERTAIN CLASS MEMBERS.
—For purposes of this paragraph, a corporation,
investment company, pension plan, partnership, or
other entity, shall be treated as one person or
prospective class member, but only if the entity is not
established for the purpose of participating in the
action.

"(E) COVERED SECURITY. —The term ‘covered
security’ means a security that satisfies the standards
for a covered security specified in paragraph (1) or (2)
of section 18(b) of the Securities Act of 1933, at the
time during which it is alleged that the
misrepresentation, Omission, or manipulative or
deceptive conduct occurred, except that such term
shall not include any debt security that is exempt from
registration under the Securities Act of 1933 pursuant
to rules issued by the Commission under section 4(2)
of that Act.

A40

"(F) RULE OF CONSTRUCTION. — Nothing in this
paragraph shall beconstrued to affectthe discretion of

a State court in determining whether actions filed in

such court should be joined, consolidated, or

otherwise allowed to proceed as a single action.".

(2) CIRCUMVENTION OF STAY OF DISCOVERY.
—Section 21D(b)(3) of the Securities Exchange Act of
1934 (15 U.S.C. 78u-4(b)(3)) is amended by adding at the
end the following new subparagraph:

"(D) CIRCUMVENTION OF STAY OF DISCOVERY.
— Upon a proper showing, a court may stay discovery
proceedings in any private action in a State court, as
necessary in aid of its jurisdiction, or to protect or
effectuate its judgments, in an action subject to a stay of
discovery pursuant to this paragraph.".

(c) APPLICABILITY. [15 USC 77p note.] —The
amendments made by this section shall not affect or apply
to any action commented before and pending on the date of
enactment of this Act.

SEC. 102. PROMOTION OF RECIPROCAL SUBPOENA
ENFORCEMENT. [15 USC 78u note.]

(a) COMMISSION ACTION. —The Securities and
Exchange Commission, in consultation with State securities
commissions (or any agencies or offices performing like
functions), shall seek to encourage the adoption of State
laws providing for reciprocal enforcement by State
securities commissions of subpoenas issued by another
State securities commission seeking to compel persons to
attend, testify in, or produce documents or records in
connection with an action or investigation by a State _
securities commission of an alleged violation of State
securities laws.

A41

(b) REPORT. [Deadline] — Not later than 24 months after
the date of enactment of this Act, the Securities and
Exchange Commission (hereafter in this section referred to
as the "Commission") shall submit a report to the
Congress —

(1) identifying the States that have adopted laws
described in subsection (a);

(2) describing the actions undertaken by the
Commission and State securities commissions to promote
the adoption of such laws; and

(3) identifying any further actions that the
Commission recommends for such purposes.

TITLE IIL— REAUTHORIZATION OF THE SECURITIES
AND EXCHANGE COMMISSION SEC. 201.
AUTHORIZATION OF APPROPRIATIONS.

Section 35 of the Securities Exchange Act of 1934 (15
U.S.C. 78kk) is amended to read as follows:

"SEC. 35. AUTHORIZATION OF APPROPRIATIONS.

"(a) IN GENERAL. —In addition to any other funds
authorized to be appropriated to the Commission, there are
authorized to be appropriated to carry out the functions,
powers, and duties of the Commission, $351,280,000 for
fiscal year 1999.

"(b) MISCELLANEOUS EXPENSES. — _ Funds
appropriated pursuant to this section are authorized to be
expended —

"(1) not to exceed $3,000 per fiscal year, for official
reception and representation expenses;

A42

"(2) not to exceed $10,000 per fiscal year, for funding a
permanent secretariat for the International Organization
of Securities Commissions; and

"(3) not to exceed $100,000 per fiscal year, for expenses
for consultations and meetings hosted by _ the
Commission with foreign governmental and other
regulatory officials, members of their delegations,
appropriate representatives, and staff to exchange views
concerning developments relating to securities matters,
for development and implementation of cooperation
agreements concerning securities matters, and provision
of technical assistance for the development of foreign
securities markets, such expenses to include necessary
logistic and administrative expenses and the expenses of
Commission staff and foreign invitees in attendance at
such consultations and meetings, including —

"(A) such incidental expenses as meals taken inthe
course of such attendance;

"(B) any travel or transportation to or from such
meetings; and

"(C) any other related lodging or subsistence.".

SEC. 202. REQUIREMENTS FOR THE EDGAR SYSTEM.

Section 35A of the Securities Exchange Act of 1934 (15
U.S.C. 78ll) is amended —

(1) by striking subsections (a), (b), (c), and (e); and
(2) in subsection (d) —

(A) by striking "(d)";

(B) in paragraph (2), by striking "; and" at the end
and inserting a period; and

(C) by striking paragraph (3).

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SEC. 203. COMMISSION PROFESSIONAL
ECONOMISTS.

Section 4(b) of the Securities Exchange Act of 1934 (15
U.S.C. 78d(b)) is amended —
(1) by redesignating paragraph (2) as paragraph (3);
and
(2) by inserting after paragraph (1) the following:
"(2) ECONOMISTS. —

"(A) COMMISSION AUTHORITY.
— Notwithstanding the provisions of chapter 51 of title
5, United States Code, the Commission is authorized

"(i) to establish itsown criteria for the selection of
such professional economists as the Commission
deems necessary to carry out the work of the
Commission;

"(ii) to appoint directly such _ professional
economists as the Commission deems qualified;
and

"(iii) to fix and adjust the compensation of any
professional economist appointed under this
paragraph, without regard to the provisions of
chapter 54 of title 5, United States Code, or
subchapters II, Ill, or VIII of chapter 53, of title 5,
United States Code.

"(B) LIMITATION ON COMPENSATION. —No
base compensation fixed for an economist under this
paragraph may exceed the pay for Level IV of the ~
Executive Schedule, and no payments to an economist
appointed under this paragraph shall exceed the
limitation on certain payments in section 5307 of title
5, United States Code.

"(C) OTHER BENEFITS. — All professional economists
appointed under this paragraph shall remain within the

A44

existing civil service system with respect to employee
benefits.".

TITLE III—CLERICAL AND TECHNICAL
AMENDMENTS

SEC. 301. CLERICAL AND TECHNICAL
AMENDMENTS.

(a) SECURITIES ACT OF 1933.—The Securities Act of
1933 (15 U.S.C. 77 et seq.) is amended as follows:

(1) Section 2(a)(15)i) (15 U.S.C. 77b(a)(15)(i)) is
amended —

(A) by striking "3(a)(2) of the Act" and inserting

"3(a)(2)"; and

(B) by striking "section 2(13) of the Act" and
inserting "paragraph (13) of this subsection".

(2) Section 11(f)(2)(A) (15 U.S.C. 77k(f)(2)(A)) is
amended by striking "section 38" and inserting "section
21D(f)".

(3) Section 13 (15 US.C. 77m) is amended —

(A) by striking "section 12(2)" each place it appears
and inserting "section 12(a)(2)"; and
(B) by striking "section 12(1)" each place it appears

and inserting "section 12(a)(1)".

(4) Section 18 (15 US.C. 77r) is amended —

(A) in subsection (b)(1)(A), by inserting ", or
authorized for listing," after "Exchange, or listed";
(B) in subsection (c)(2)(B)(i), by striking "Capital

Markets Efficiency Act of 1996" and _ inserting

"National Securities Markets Improvement Act of

1996";

(C) in subsection (c)(2)(C)(i), by striking "Market"
and inserting "Markets";
(D) in subsection (d)(1)(A) —

A45

(i) by striking "section 2(10)" and _ inserting

"section 2(a)(10)"; and

(ii) by striking "subparagraphs (A) and (B)" and

inserting "subparagraphs (a) and (b)";

(E) in subsection (d)(2), by striking "Securities
Amendments Act of 1996" and inserting "National
Securities Markets Improvement Act of 1996"; and

(F) in subsection (d)(4), by striking "For purposes of
this paragraph, the" and inserting "The".

(5) Sections 27, 27A, and 28 (15 U.S.C. 77z-1, 77z-2,
77z-3) are transferred to appear after section 26, in that
order.

(6) Paragraph (28) of schedule A of such Act (15 U.S.C.
77aa(28)) is amended by striking "identic" and inserting
"identical".

(b) SECURITIES EXCHANGE ACT OF 1934. —The
Securities Exchange Act of 1934 (15 U.S.C. 78 et seq.) is
amended as follows:

(1) Section 3(a)(10) (15 U.S.C. 78c(a)(10)) is amended
by striking "deposit, for" and inserting "deposit for".

(2) Section 3(a)(12)(A)(vi) (15 U.S.C. 78c(a)(12)(A)(vi))
is amended by moving the margin 2 em spaces to the left.

(3) Section 3(a)(22)(A) (15 U.S.C. 78c(a)(22)(A)) is

amended —
(A) by striking "section 3(h)" and inserting "section
3"; and
(B) by striking "section 3(t)" and inserting "section
>.

(4) Section 3(a)(39)(B)(i) (15 U.S.C. 78c(a)(39)(B)(i)) is
amended by striking "an order to the Commission" and
inserting "an order of the Commission".

(5) The following sections are each amended by
striking "Federal Reserve Board" and inserting "Board of
Governors of the Federal Reserve System": subsections

A46

(a) and (b) of section 7 (15 U.S.C. 78g (a), (6)); section
17(g) (15 U.S.C. 78q(g)); and section 26 (15 U.S.C. 78z).

(6) The heading of subsection (d) ofsection 7 (15U.S.C.
78g(d)) is amended by striking "EXCEPTION" and
inserting "EXCEPTIONS".

(7) Section 14(g)(4) (15 U.S.C. 78n(g)(4)) is amended by
striking "consolidation sale," and _ inserting
"consolidation, sale,".

(8) Section 15 (15 US.C. 780) is amended —

(A) in subsection (c)(8), by moving the margin 2 em
spaces to the left;

(B) in subsection (h)(2), by striking "affecting" and
inserting "effecting";

(C) in subsection (h)(3)(A)(i)(II)(bb), by inserting

"or" after the semicolon;

(D) in subsection (h)(3)(A)(ii)(I), by striking

"maintains" and inserting "maintained";

(E) in subsection (h)(3)(B)(ii), by striking

"association" and inserting "associated".

(9) Section 15B(c)(4) (15 U.S.C. 780-4(c)(4)) is amended
by striking "convicted by any offense" and inserting
"convicted of any offense".

(10) Section 15C(f)(5) (15 U.S.C. 780-5(f)(5)) is
amended by striking "any person or class or persons" and
inserting "any person or class of persons".

(11) Section 19(c)(5) (15 U.S.C. 78s(c)6)) is amended by
moving the margin 2 em spaces to the right.

(12) Section 20 (15 U.S.C. 78t) is amended by
redesignating subsection (f) as subsection (e).

(13) Section 21D (15 U.S.C. 78u-4) is amended —

(A) in subsection (g)(2)(B)(i), by striking "paragraph

(1)" and inserting "subparagraph (A)".

(B) by redesignating subsection (g) as subsection (f);
and

A47

(14) Section 31(a) (15 U.S.C. 78ee(a)) is amended by
striking "this subsection" and inserting "this section".

(c) INVESTMENT COMPANY ACT OF 1940.—The
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) is
amended as follows:

(1) Section 2(a)(8) (15 U.S.C. 80a-2(a)(8)) is amended
by striking "Unitde" and inserting "United".

(2) Section 3(b) (15 U.S.C. 80a-3(b)) is amended by
striking "paragraph (3) of subsection (a)" and inserting
"paragraph (1)(C) of subsection (a)".

(3) Section 12(d)(1)(G)]G)(III)(bb) (15 USC.
80a-12(d)(1)(G)(i)(III)(bb)) is amended by striking "the
acquired fund" and inserting "the acquired company".

(4) Section 18(e)(2) (15 U.S.C. 80a-18(e)(2)) is amended
by striking "subsection (e)(2)" and inserting "paragraph
(1) of this subsection".

(5) Section 30 (15 US.C. 80a-29) is amended —

(A) by inserting "and" after the semicolon at theend
of subsection (b)(1); ;

(B) in subsection (e), by striking "semi-annually"
and inserting "semiannually"; and

(C) by redesignating subsections (g) and (h), as
added by section 508(g) of the National Securities

Markets Improvement Act of 1996, as subsections (i)

and (j), respectively.

(6) Section 31(f) (15 U.S.C. 80a-30(f)) is amended by
striking "subsection (c)" and inserting "subsection (e)".

(d) INVESTMENT ADVISERS ACT OF 1940.—The
Investment Advisers Act of 1940 (15 U.S.C. 80b et seq.) is
amended as follows:

(1) Section 203(e)(8)(B) (15 U.S.C. 80b-3(e)(8)(B)) is
amended by inserting "or" after the semicolon. |

A48

(2) Section 222(b)(2) (15 U.S.C. 80b-18a(b)(2)) is
amended by striking "principle" and_ inserting
"principal".

(e) TRUST INDENTURE ACT OF 1939.—The Trust
Indenture Act of 1939 (15 U.S.C. 77aaa et seq.) is amended
as follows:

(1) Section 303 (15 U.S.C. 77ccc) is amended by striking
"section 2" each place it appearsin paragraphs (2) and (3)
and inserting "section 2(a)".

(2) Section 304(a)(4)(A) (15 U.S.C. 77ddd(a)(4)(A)) is
amended by striking "(14) of subsection" and inserting
"(13) of section".

(3) Section 313(a) (15 U.S.C. 77mmm(a)) is amended —

(A) by inserting "any change to" after the paragraph
designation at the beginning of paragraph (4); and
(B) by striking "any change to" in paragraph (6).

(4) Section 319(b) (15 U.S.C. 77sss(b)) is amended by
striking "the Federal Register Act" and inserting "chapter
15 of title 44, United States Code,".

SEC. 302. EXEMPTION OF SECURITIES ISSUED IN
CONNECTION WITH CERTAIN STATE HEARINGS.

Section 18(b) (4)(C) of the Securities Act of 1933 (15 U.S.C.
77r(b)(4)(C)) is amended by striking “paragraph (4) or (11)"
and inserting "paragraph (4), (10), or (11)".

Approved November 3, 1998.

A49

APPENDIX E

15 U.S.C. § 77p — Additional remedies; limitation on
remedies

(a) Remedies additional

Except as provided in subsection (b) of this section, the
rights and remedies provided by this subchapter shall be in
addition to any and all other rights and remedies that may
exist at law or in equity.

(b) Class action limitations

No covered class action based upon the statutory or
common law of any State or subdivision thereof may be
maintained in any State or Federal court by any private
party alleging —

(1) an untrue statement or omission of a material fact
in connection with the purchase or sale of a covered
security; or

(2) that the defendant used or employed any
manipulative or deceptive device or contrivance in
connection with the purchase or sale of a covered
security.

(c) Removal of covered class actions

Any covered class action brought in any State court
involvinga covered security, as set forth in subsection (b) of
this section, shall be removable to the Federal district court
for the district in which the action is pending, and shall be
subject to subsection (b) of this section.

(d) Preservation of certain actions
(1) Actions under State law of State of incorporation

A50

(A) Actions preserved

Notwithstanding subsection (b) or (c) of this
section, a covered class action described in
subparzeraph (B) of this paragraph that is based
upon the statutory or common law of the State in
which the issuer is incorporated (in the case of a
corporation) or organized (in the case of any other
entity) may be maintained ina State or Federal court
by a private party.

(B) Permissible actions

A covered class action is described in this
subparagraph if itinvolves —

(i) the purchase or sale of securities by the
issuer or an affiliate of the issuer exclusively
from or to holders of equity securities of the
issuer; Or

(ii) any recommendation, position, or other
communication with respect to the sale of
securities of the issuer that —

(I) is made by or on behalf of the issuer or
an affiliate of the issuer to holders of equity
securities of the issuer; and

(II) concerns decisions of those equity
holders with respect to voting their securities,
acting in response to a tender or exchange
offer, or exercising dissenters' or appraisal
rights.

(2) State actions

(A) In general

Notwithstanding any other provision of this
section, nothing in this section may be construed to
precludea State or political subdivision thereof or a
State pension plan from bringingan action involving
a covered security on its own behalf, or as a member
of a class comprised solely of other States, political

AS1

subdivisions, or State pension plans that are named

plaintiffs, and that have authorized participation, in

such action.

(B) "State pension plan" defined
For purposes of this paragraph, the term ''State

pension plan" means a pension plan established and

maintained for its employees by the government of

the State or political subdivision thereof, or by any

agency or instrumentality thereof.

(3) Actions under contractual agreements between
issuers and indenture trustees

Notwithstanding subsection (b) or (c) of this section,
a covered class action that seeks to enforce a contractual
agreement between an issuer and an indenture trustee
may be maintained in a State or Federal court by a party
to the agreement or a successor to such party.

(4) Remand of removed actions

In an action that has been removed from a State
court pursuant to subsection (c) of this section, if the
Federal court determines that the action may be
maintained in State court pursuant to this subsection,
the Federal court shall remand such action to such State
court.

(e) Preservation of State jurisdiction

The securities commission (or any agency or office
performing like functions) of any State shall retain
jurisdiction under the laws of such State to investigate and
bring enforcement actions.

(f) Definitions

For purposes of this section, the following definitions
shall apply:

A52

(1) Affiliate of the issuer

The term "affiliate of the issuer" means a person that
directly or indirectly, through one or more
intermediaries, controls or is controlled by or is under
common control with, the issuer.

(2) Covered class action
(A) In general
The term "covered class action" means —
(i) any single lawsuitin which —

(1) damages are sought on behalf of more
than 50 persons or prospective class
members, and questions of law or fact
common to those persons or members of the
prospective class, without reference to issues
of individualized reliance on an alleged
misstatement or omission, predominate over
any questions affecting only individual
persons or members; or

(Il) one or more named parties seek to
recover damages ona representative basis on
behalf of themselves and other unnamed
parties similarly situated, and questions of
law or fact common to those persons or
members of the prospective class
predominate over any questions affecting
only individual persons or members; or
(ii) any group of lawsuits filed in or pending

in the same court and involving common
questions of law or fact, in which —

(1) damages are sought on behalf of more
than 50 persons; and

(II) the lawsuits are joined, consolidated,
or otherwise proceed as a single action for

any purpose.

A53

(B) Exception for derivative actions
Notwithstanding subparagraph (A), the term
“covered class action" does not include an
exclusively derivative action brought by one or more
shareholders on behalf of a corporation.
(C) Counting of certain class members
For purposes of this paragraph, a corporation,
investment company, pension plan, partnership, or
other entity, shall be treated as one person or
prospective class member, but only if the entity is
not established for the purpose of participating in
the action.
(D) Rule of construction
Nothing in this paragraph shall be construed to
affect the discretion of a State court in determining
whether actions filed in such court should be joined,
consolidated, or otherwise allowed to proceed as a
single action.
(3) Covered security
The term "covered security" means a security that
satisfies the standards for a covered security specified in
paragraph (1) or (2) of section 77r(b) of this title at the
time during which it is alleged that the
misrepresentation, omission, or manipulative or
deceptive conduct occurred, except thatsuch term shall
not include any debt security that is exempt from
registration under this subchapter pursuant to rules
issued by the Commission under section 77d(2) of this
title.

A54 '

APPENDIX F
15 U.S.C. § 1441 — Actions removable generally

(a) Except as otherwise expressly provided by Act of
Congress, any civil action brought in a State court of which
the district courts of the United States have original
jurisdiction, may be removed by the defendant or the
defendants, to the district court of the United States for the
district and division embracing the place where such action
is pending. For purposes of removal under this chapter, the
citizenship of defendants sued under fictitious names shall
be disregarded.

(b) Any civil action of which the district courts have
original jurisdiction founded on a claim or right arising
under the Constitution, treaties or laws of the United States
shall be removable without regard to the citizenship or
residence of the parties. Any other such action shall be
removable only if none of the parties in interest properly
joined and served as defendants is a citizen of the State in
which such action is brought.

(c) Whenever a separate and independent claim or
cause of action within the jurisdiction conferred by section
1331 of this title is joined with one or more otherwise
non-removable claims or causes of action, the entire case
may be removed and the district court may determine all
issues therein, or, in its discretion, may remand all matters
in which State law predominates.

(d) Any civil action brought in a State court against a
foreign state as defined in section 1603(a) of this title may be
removed by the foreign state to the district court of the
United States for the district and division embracing the

a, ae

A55

place where such action is pending. Upon removal the
action shall be tried by the court without jury. Where
removal is based upon this subsection, the time limitations
of section 1446(b) of this chapter may be enlarged at any
time for cause shown.

(e) The court to which such civil action is removed is
not precluded from hearing and determining any claim in
such civil action because the State court from which such
civil action is removed did not have jurisdiction over that
claim.

A56

APPENDIX G
[The Wall Street Journal, July 17, 2001, at p. C23]

Prudential Limits Brokers' B-Share Sales

FUND
TRACK

By AARON LUCCHETTI
Staff Reporter of THE WALL STREET JOURNAL

In a move likely to highlight the dilemma of which
mutual-fund share classés are appropriate for different
investors, Prudential Securities Inc. has instructed its
brokers to limit sales of "B-share" mutual funds to clients
investing $100,000 or less in a single fund. The decision,
which took effect this month, follows regulatory scrutiny of
brokers who steered wealthy clients to B-share mutual
funds when other share classes would have offered cost
savings. The policy at Prudential, a unit of Prudential
Insurance Co. of America in Newark, N.J., affects its 6,500
brokers as well as insurance agents who sell mutual funds
at a separate Prudential subsidiary.

"In most cases, we found that it's better for the client
economically," to buy A-class shares when investing more
than $100,000, Prudential spokeswoman Susan Atran said.
Before this month, managers at Prudential branch offices
decided on their own which share class to sell to investors.
Now, while branch offices may still sell B shares to
wealthier mutual-fund clients, they will have to show the
"transaction is economically in the best interest of the
client" Ms. Atran said. ;

Mutual-fund share classes are essentially different
pricing packages for entry into a fund, With so-called A

A57

shares, investors pay an up front charge - usually 3% to 6%
of assets. When buying B shares, investors usually pay a
charge upon exiting the fund, as wellasa higher annual fee.
The issue has grown in importance as a higher percentage
of mutual funds are bought through advisers and brokers
who charge some kind of commission in addition to the
fund's annual management fee.

For most mutual-fund investors, deciding between A
shares and B shares is a difficult decision that has to do in
part with how long they plan to hold the fund. Giving up
money at the start is painful for many, buta higher annual
fee can hurt performance during the long run. "I don'tthink
there's a simple answer on the face of it," said Geoffrey
Bobroff, a fund consultant in East Greenwich, R.I. "It really
turns on your belief as to where the markets are going."

With wealthier clients, however, mutual funds often
reduce or waive the upfront sales charge on A shares,
making them a lower-cost alternative to B shares. In April,
the National Association of Securities Dealers' regulatory
arm levied a fine onSt. Louisbrokerage firm Stifel, Nicolaus
& Co., alleging that one of its brokers erroneously advised
customers to buy 13 shares instead of A shares. Without
admitting or denying the allegations, Stifel agreed to
ex-change the customers' Class B shares for Class A at no
charge.

While some mutual-fund companies limit the amount
allowed to flow into B shares, often at $250,000, Prudential
is among the first in the brokerage industry to add its own
rules. "It's another layer of supervision," said Pru dential's
Ms. Atran.

Merrill Lynch, the nation's largest brokerage firm in
terms of registered representatives, hasn't put a dollar
restrictionon B shares. But a spokesman said yesterday that
the New York company "continues to take Suitability issues
very seriously. They're a prime concern in terms of the
distribution of differentclasses of mutual fundsshares." He

A58

added that brokers are trained and educated about which
mutual-fund shares are appropriate to sell to different
clients in different situations.

For investors who buy and sell their funds rapidly, a
third share class, often called C shares, makes sense because
they usually don't charge a commission on either the
purchase or sale of the fund. But these "level load" funds
often have higher continuing, annual expenses, which
makes them a worse deal for buy-and-hold investors.
Proponents of A shares say they are a good idea for
long-term investors since they usually have the lowest
annual expenses, but B shares often convert to A shares
after they are held by the investor for several years.

A59
APPENDIX H
[The New York Times, March 12, 2003, at p. C17]
Most Fund Brokers in Study Failed to Give Full Discounts

By FLOYD NORRIS

An examination of 43 brokerage firms found that all but
2 had overcharged at least some customers who were
eligible for discounts on the purchases of mutual funds,
regulators said yesterday. Over all, almost a third of
customers who were eligible were overcharged.

The regulators said that some disciplinary actions were
possible but added that in many cases the problems
appeared to have stemmed from inadequate procedures at
brokerage firms rather than an intent to overcharge
customers.

"Over all, we thought it was more sloppiness than
intentional," said Lori Richards, the directorof the Securities
and Exchange Commission's office of compliance
inspections and examinations.

The discounts related to the sale of mutual funds that
charge sales commissions, known in the fund industry as
loads.

Most load funds offer lower commissions to investors
who exceed certain "break points" by investing more money
in their funds.

Different fund families have different break points and
different policies on other issues, including what family
accounts can be consolidated for purposes of calculating
them and whether investors can geta lower rate by signing
a letter of intent, promising to invest a certain amount in a
group of funds over the next year or 13 months.

The inquiry by the S.E.C., NASD and the New York
Stock Exchange was conducted from November to January

A60

and looked at more than 9,000 mutual fund transactions at
the 43 firms. It chose transactions in which miscalculations
seemed possible and discovered 5,515 transactions that
appeared to be eligible for reduced sales charges. Of those,
1,757 did not receive a discount or received one that was
smaller than deserved. That came to 32 percent of the
transactions that were eligible.

The discounts not provided ranged from $2 to $10,289
and averaged $364 for each transaction. While two firms
provided all the discounts that were required, three others
did not provide any of them. The regulators did not identify
the firms but said they would be required to refund
overcharges. All firms that sell load mutual funds will also
be required to review their records.

Mary Schapiro, NASD's vice chairwoman, said errors
were far more likely at firms that process orders
electronically rather than use paperforms. "Thishas become
an incredibly complex business, with volume discounts and
linkages of various accounts, and technology in many firms
did not keep up with it," she said.

In some cases, the regulators found instances of
investors missing out on commission discounts they might
have been eligible for had they received better advice. Some
investors bought almost enough shares to receive a
discount, raising the question of whether the broker had
informed them of the savings available if they had invested
a little more. In other cases, customers were sold several
similar funds, like several high-yield bond funds, when they
would have paid significantly lower commissions had they
put the entire investment in one fund.

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386015_1449%3A2. Public record. Not legal advice.